Thursday, October 20, 2011

Via HBL, I have learned that Peter Schiff doesn't like the name of GOP presidential candidate Herman Cain's 9-9-9 plan.

Cain would replace the current system of income and payroll taxes with a
9% flat-rate personal income tax, a 9% corporate tax, and a 9% national
sales tax. Great idea. Such a system would unburden businesses, provide
a tax cut for most Americans, and shift taxation to consumption and
away from income generation. This is exactly what our economy needs. But
unlike our current corporate tax system, the plan eliminates the deductibility of
wages and salaries from corporate income. The net effect is the
creation of a brand new 9% tax on wages. When this fourth 9 falls from
Cain's sleeve, many of his opponents will likely accuse him of cheating.

Schiff still sees merit in the plan, though. (That said, I am cautious about getting rid of tax loopholes, at least until there is real momentum towards restricting government to its proper scope.)

Even with its flaws, the 9-9-9-9 plan would create an economic windfall
by lowering the top corporate rate to 9% from 50% (35% at the corporate
level and 15% on dividends taxed at the individual level), and
simplifying the tax code to reduce unnecessary compliance costs and the
economically inefficient behavior that is created by perverse tax
incentives.

Later, though, Schiff states that he favors cuts in spending to make a "real" 9-9-9 plan possible, by allowing the removal of the de facto new 9% earnings tax.

After hearing Cain's lightweight rivals make silly quips about pizza prices or flipping the digits upside-down,
it's good to see a substantive critique of Cain's plan by someone who both favors a
strong economy and knows what it would take for us to have one again.

12 comments:

I was, too, for a long time, but I changed my mind recently. Instead, now, I advocate this:

A new provision should be passed to make it explicit that the government has no right to use the tax code for behavior modification or "encouragement." This would do away with all deductions, payroll programs, pre-tax activities, etc.

When you think about it, the tax code is really an enormous source of paternalism and general rights-stompery. Not to mention it enshrines so many irrational behaviors - look at its consequences to health care and housing.

I think that, in that light, it would be worth the consequences to make it flat.

I know what you're trying to do, but the problem with that idea is that it is too vague. You'd end up in an endless quagmire of explaining what "behavior modification or 'encouragement'" meant or, worse, quibbling about what kinds are "acceptable" and what kinds aren't.

Well, in this particular context, my understanding is that the flat taxes on the table don't contain any "deductions" and such. So what I'm saying is that I think in this case that the de facto - not even the principled removal, but the de facto one - of behavior mods is worth it, even if it would result in a net tax increase from a hidden "9." The reason being that behavior mods are that bad.

This would replace the current tax code, in part by adding a brand new national sales tax, and in part by canceling out lots of deductions from the income tax of the old tax code. While the nominal rate of the new income tax is lower, its actual rate can, in effect, be higher than nine percent, which is the point Schiff makes.

My point here is that this doesn't do away with the income tax (but does do away with lots of deductions) AND adds a new sales tax in.

I guess I'm just past the point of worrying about a new tax. They've more than shown that they will use inflation to take what they want, which is worse. If that battle is to be fought, I think it has to be done on the spending side.

The important part of the tax side is that our corporate taxes are competitive, so that we don't drive wealth out of the country, and that the taxes on the wealthy are low enough to not cripple the producers. I think that the flat tax would do better on both of those fronts.

Contra OWS, it's more important that the rich aren't taxed too much than what the taxes do to the other so-called 99%. If it's de-facto higher than 9%, that is fine, so long as it's lower than the 30-40% that the most productive see today.

And I think there is a great victory to be had if the something like 40% of people who pay no net tax were to actually pay some. It might serve to control their out-of-control support for unsustainable government policies if they had to actually pay... well, anything, for it.

That and the removal of the tyranny of deductions. Which I don't think I've really emphasized as well as I should. That it is taken for granted that the government can just become the police of what constitutes good and bad behavior using the tax code is a very tyrannical thing. To remove it is worth another tax, even if that amounted to higher taxes overall, which it doesn't sound like it does.

I mean, does it really matter how many taxes they have? Is there any difference between two taxes at 20% each and four taxes at 10%? They can take the same with either. I'd agree the former is better because it's more transparent, but it's not enough to sink the plan given the list of advantages I see.